EcommerceBytes-NewsFlash, Number 3156 - September 19, 2013     2 of 3

Victims of Online Fraud Avoid Smaller Online Merchants

By David A. Utter

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While ecommerce is booming with online sales showing year over year increases and projections for continued growth, the downside of that comes in the form of more costly fraud activity affecting internet sellers.

The LexisNexis True Cost of Fraud Study found merchants overall are paying $2.79 in costs for each dollar lost to fraud. That's up by ten cents from 2012, and LexisNexis said this is attributed to a spike in online fraud.

Such fraud against online merchants has been even more costly. The study found online channel frauds cost sellers $3.10 in costs for every dollar lost to fraud. LexisNexis said fraud increased 36 percent through the online channel to merchants.

eBay's payment processing arm PayPal did see a favorable comment in the report. LexisNexis cited an executive at a mid-sized card-issuing financial institution said that although they see some PayPal fraud, they haven't seen anything that would be considered "a coordinated scheme to exploit a weakness in the PayPal ecosystem."

The report noted a dramatic drop in fraudulent transactions attributable to alternative payment methods in 2012, which it believes was in great part due to actions taken by a " temporarily-more-cautious" PayPal in the wake of a 2011 data breach. "Since PayPal is the most prevalent alternative payment method (accepted by 60% of merchants, compared to only 8% for Google Checkout, and 9% for all other alternative payments methods), it is not implausible that security precautions taken by the company and its users would affect trends in the entire alternative payments market."

But, the report noted, companies accepting alternative payment methods reported that the share of fraudulent transactions involving this payment method in 2013 rebounded to nearly their 2010 levels.

Medium-size merchants, those doing between $1 million and $50 million in sales, seem to be favorites of online fraud. While all merchants saw an increase in such fraud, medium-sized businesses experienced the greatest percentage of fraudulent online transactions.

Ecommerce sites run the risk of people avoiding certain merchants if they have been victims of fraud. LexisNexis found nearly one out of three consumers will do this. "This is especially true for smaller online merchants, as 50% of fraud victims that avoid certain merchants as a result of being defrauded will specifically avoid patronizing these businesses in the future."

With millions of Americans subjected to identity fraud on an annual basis, the study recommended presenting a reassurance of strong security to reassure potential customers.

The study also cautioned that, as brick and mortar retailers become more resistant to fraud, such behavior will increasingly move online. Extra physical measures like chip-and-pin cards conforming to the EMV (Europay MasterCard Visa) standard will make it harder for criminals to use stolen credit card details.

About the author:

David A. Utter is a freelance writer based in Lexington, KY. He has covered technology topics from search to security to online business and has been quoted in places like ZDNet and BusinessWeek. He considers his appearance on NPR's "All Things Considered" with long-time host Robert Siegel a delightful highlight. Send your tips to and find him on Twitter @davidautter and on LinkedIn.

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